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Follow the Money: Confusion at Treasury

If you want to catch a criminal or terrorist, does it
make sense to “follow the money”? A “yes” answer makes sense if you
can identify at least one of the individuals or institutions
connected with the suspected wrongdoer. However, if you are trying
to follow money flows in general or all money flows, it is not
likely your work will be very productive, and it will also involve
massive violations of civil liberties.

Back in the 1970s and ’80s, law-enforcement agencies were having
trouble catching and convicting major drug dealers. Some thought
the solution might be to identify the criminal monetary proceeds of
the drug dealers and then make it illegal to use or hide money from
illegal activities — i.e., money laundering. The result was the
Money Laundering Control Act of 1986 that, for the first time, made
money-laundering illegal. There have been a number of subsequent
laws aimed at strengthening the anti-money laundering regulations,
including last year’s “Patriot Act.” Money laundering is not an
easy crime to define or detect since an almost infinite number of
assets are “fungible” — that is, can be readily turned into money
and vise versa.

As an example, let us say Joe is a drug dealer in London. Every
day he collects $10,000 in cash from selling drugs. As a cover, he
has a fish-and-chips shop in London that is a cash business, and so
he commingles his drug money with his legitimate fish-and-chips
receipts and makes a daily bank deposit. To the bank, it appears
that Joe has a nicely profitable fish-and-chips business just like
thousands of others of profitable cash businesses the bank deals
with.

Joe needs to pay his drug supplier, Han, who operates a toy
export business out of Hong Kong [in which he smuggles the drugs].
If Joe sends money to Han’s account in Hong Kong that could be
noticed by authorities if there is no invoice for a product or
service. So Joe arranges to buy a painting for a $100,000 from an
associate of Han’s in Hong Kong. In fact, the painting only cost
Han a few hundred dollars [which Joe, of course, knows], because
art values are subjective, who is to say the painting is not worth
a $100,000 to Joe?

There are infinite numbers of variations of such schemes, which
are most difficult for law-enforcement officers to distinguish from
totally legitimate business operations. If the police suspect Joe
or Han of drug dealing, it makes perfect sense to “follow the
money,” but just following money without knowing who might be
involved in a crime is most often a waste of time and money. When
the total costs to the banking system of the myriad
anti-money-laundering reporting requirements are correctly
measured, few anti-money laundering efforts are cost-effective.

Terrorism is now a top concern of governments as it ought to be.
One of the responses has been trying to follow the terrorists’
money and add more reporting requirements to banks under the
anti-money-laundering regulations.

However, much of this makes no sense. Most terrorists’ money
comes from legal sources and is used for illegal acts, which is the
opposite of criminals using illegally obtained money for legal
acts.

Osama bin Laden is reported to be a wealthy man as a result of
his family’s construction and oil business, so the money may be
legal but the use of it is not. We know terrorist activities are
often funding through charities, by well-meaning people who think
they are helping Arab children or some such, rather than funding
terrorism. Again the money is legal, but its use is not.

Virtually all governments have the legal tools they need to get
banks to give them transactions and account information on
suspected criminals or terrorists. There are also extensive
information-sharing agreements among governments for such specific
suspicions.

However, there is now a major effort underway to do blanket
[mass financial data on individuals who are not suspected of any
illegal act] sharing of information between governments under the
guise of fighting money laundering or terrorism. This effort is
being driven by the Europeans who are more concerned about tax
competition than terrorism. In fact, blanket information sharing
will make us less safe because all governments leak information,
and personal financial information has great value to criminals and
terrorists.

Law-enforcement dollars, like all other dollars, are scarce and
should be used where they will provide the most safety. Many
money-laundering costs, particularly on the financial sector, have
only increased the costs of banking for all of us and have not
improved our safety. The government-to-government blanket financial
information sharing schemes will make us poorer and a lot less
safe.

The Treasury Department is responsible for financial
information-sharing, and many of the anti-money-laundering efforts.
It needs to do a far better job in measuring the total costs,
including private-sector monetary costs, and the high probability
of information leaks and abuse of these information-sharing and
data-reporting schemes and regulations. Making the necessary
changes should be a top priority for the new Treasury
secretary.